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The Voice of the Paparazzi

By Dick Martin

The paparazzi used to focus their lenses on the likes of Brad and Angelina for the vicarious thrill of the masses. But now they and their keyboard-wielding colleagues play a critical role in corporate governance and marketing.

Way back in 1970, economist Albert Hirschman suggested consumers and investors have only two choices when they believe a company is doing them wrong: They can “exit” (end the relationship) or they can “voice” (complain until the company changes).

As a practical matter, exit doesn’t accomplish much anymore. Organized product boycotts are rare. And when Hirschman wrote his paper, the turnover of an average managed mutual fund was 17 percent a year; by 2000, it was 91 percent, meaning funds sold nearly all of their holdings every year. Many funds, in fact, have turnover ratios of more than 100 percent, holding the typical company share for less than a year.

That leaves voice. Again, when Hirschman wrote his paper, voice belonged to a privileged few. One consumer’s voice tended to get lost in the clamor of the marketplace. Even if consumers or investors ganged up on a company, their voices could be drowned out by a barrage of advertising and misdirection.

Today, everyone is a publisher. Blogs and tweets have outsized influence. According to one survey, 90 percent of consumers say that online reviews influence their purchasing decisions.

And media of all sorts amplify the voices of governance experts who used to toil in obscurity. Recently, the media reported Walmart's board was criticized by an institutional-investor group for being too chummy with management. Last week, the media reported Chipotle’s shareowners overwhelmingly voted against an executive-compensation plan they considered overly generous.

None of these expressions of “voice” is binding. But when the mainstream media report them, they take on added urgency. Corporate America is not governed by the media, but it is highly influenced by it. When I attended AT&T board meetings, I was far more likely to hear “how will the Journal react to this?" than “what will the SEC say?”

And then this story on the front page of The New York Times puts a human face on GM’s ignition switch problems, turning the emotional level of the discussion way up.

Law and finance professor Louis Lowenstein termed all this ”the voice of the paparazzi,” way back in 1999 before the Internet changed everything. “The new voice in town is the raucous, incessant beat of the analysts and the media, and boards and CEOs now pay heed," he wrote. “With good numbers on which to base detailed, credible reports and stories, those oh so rude paparazzi have an impact that puts ministries of finance and cronyism to shame.”

That new voice now has more power than Prof. Lowenstein could ever have imagined.

The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.